More evidence has emerged today to indicate that the Rio Tinto staff detained for spying allegations have been made scapegoats for the Chinese Government’s lack of competence in consolidating China’s fragmented steel industry. However, in the course of covering up to save face, China has jeopardised its already fragile relationship with Australia. The incident has also alarmed many potential investors, who feel increasingly uneasy about China’s legal system, particularly its murky state secrets legislation.

A China Daily report insinuated that Mr Hu’s arrest was related to Tan Yixin, a senior executive of China’s major steel maker Shougang Group, who was detained on 7 July in Beijing for alleged “commercial crimes”. The report further accused Mr Stern Hu from Rio Tinto of violating Chinese law by soliciting individual supply contracts among small steelmakers in China. The report said:

In April, Stern Hu went to Shougang Group to negotiate the price of iron ore price.

In China, steel makers are banned from signing long term iron ore supply contracts with foreign suppliers such as Rio Tinto without permission.

China Iron and Steel Association (CISA), the industry regulator, has vowed to punish any companies that sign such agreements secretly.

Rio signed a 10-year contract with Jiangxi’s Ping Xiang Iron & Steel Co. Ltd at the end of last year, with Stern Hu as Rio’s representative. CISA was strongly against this agreement.

“The detention of Shougang’s executive may be just a beginning. Steel makers in Shandong and Hebei Province will be investigated, too,” the insider said.

Australian diplomats in China are not allowed to meet with Mr Stern Hu till later today (Friday 10 July). So it is not sure whether Mr Hu did play a role in gaining long-term iron ore contracts from smaller Chinese steel producers outside of the CISA negotiations. Even if he did, I really doubt in what way this would constitute breaking the law.

CISA, from its own admission, is a consultative regulatory body, the membership of which is entirely voluntary. In other words, it can give advice and it can even laid down regulations. But ultimately its member organisations can choose to accept or reject its rulings. So even if the supply agreements between Rio and CISA members have undermined CISA’s role in the negotiation process, there is not much CISA could do about it. The problem is obviously associated with a dysfunctional regulatory procedure, which needs to be reviewed in consultation with all stakeholders. This is usually how problems of this nature are handled in a country like Australia where the rule of law actually means something. It is an entirely different story in the People’s Republic of China,

Chinese Foreign Ministry spokesman Qin Gang said in a press conference today, “Competent authorities have sufficient evidence to prove that they have stolen state secrets and have caused huge loss to China’s economic interest and security.” ABC’s Stephen McDonell is correct in pointing out:

China’s internal spy agency must think that it has a rock-solid reason for putting these men in jail for a long time. For this reason, the hearing will probably happen quickly, though they can technically be held for many months without trial. China cannot afford to be wrong in this matter and that will worry Rio Tinto. They would not risk losing face on the international stage, unless they really wanted to put Stern Hu and the others away.

In the next few days as more evidence may come to light, I’ll be in a better position to give a more detailed analysis of CISA’s possible role in the Rio Tinto spying scandal. But for now, I’d like to quote Stuart Harris from Australian National University’s China Institute, just to remind our readers of the dire predicament facing Mr Stern Hu and his colleagues. Mr Harris is a former Australian Foreign Affairs chief. This is what he says in an interview with ABC (please click the video link titled “Aussie arrest in China over spy claims”):

CISA is taking a big defeat on this so it is possible that China will seek revenge against Rio Tinto. Australia’s effort to help the accused will fall on deaf ears while China is pre-occupied with the strife in Xinjiang. Once the dust settles on the ethnic conflict, they will have to take into account that these allegations are going to have a very serious impact on the whole issue of foreign investment.

Last but not least, my sincere thanks to MyLaowai for his generosity. Thanks mate. The next martini is on me.